Circular 4/2016 – Pension Bulletin (Jan 16) – Lifetime Allowance Reduction and Transitional Protection
NIFRS in July 2015 issued a Pension Bulletin to all staff informing them of the Chancellor-s summer budget announcement in relation to the Lifetime and Annual Allowances and changes to be implemented from 6 April 2016. This Bulletin is to provide an update position on the Lifetime Allowance Reduction and transitional protection available.
What is a Lifetime Allowance (LTA)?
This is the amount of pension an individual can save during their lifetime, which includes occupational and personal arrangements and which is not subject to tax. The current Lifetime Allowance is £1.25 million but it will reduce to £1 million from 6 April 2016. In broad terms, any pension over the LTA incurs a 25% charge to recoup the tax relief.
Lifetime Allowance Charge
The lifetime allowance charge applies when you take your benefits and is 55% of the excess if it is paid as a lump sum, or 25% of the excess if it is paid as a pension. More information about the LTA can be found here https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance.
Your benefits could be worth more than £1 million if:
- you have money purchase pension savings of £1 million
- you have a final salary pension scheme giving a pension of £50,000
- you will get a tax free lump sum in addition to your pension
- you already have pensions in payment
or a combination of these, individually worth less, but together worth £1 million.
The Government confirmed that transitional protection will be offered for those individuals who might be affected by the reduction. Legislation for both the reduction in the lifetime allowance and the transitional protection will be delivered in the Finance Bill 2016.
There will be two protections on offer with the same conditions as those offered when the LTA was reduced previously, ie:
1 Fixed protection (FP)
2 Individual protection (IP).
As long as you meet the conditions at the time you apply, you will be able to benefit from the protection on offer. You will need to have your protection before you take your benefits if you want to avoid paying the LTA charge and you will not be able to apply for transitional protection until after 5 April 2016.
Fixed Protection (FP)
The conditions for FP, you must:
- be a member of one or more registered pension schemes on 6 April 2016 or a relieved member of one or more relieved non-UK pension schemes
- not have primary protection
- not have enhanced protection
- not have fixed protection, or fixed protection 2014 at 6 April 2016
- must have had no benefit accrual since 5 April 2016.
If you have fixed protection, your LTA will be £1.25 million but you will not be able to accrue any future pension savings. This means that if you are a member of a money purchase pension scheme you cannot make further contributions to your scheme after 5 April 2016 or if you are in a final salary pension scheme you will have to become a deferred member by 6 April 2016. Further details about FP 2014 can be found at https://www.hmrc.gov.uk/manuals/ptmanual/ptm093000.htm.
Individual Protection (IP)
The conditions for individual protection, you must:
- have one or more relevant arrangements on 5 April 2014
- have total benefits from pension savings, including those already in payment on 5 April 2016 which are more than £1 million
- not have primary protection (whether active or dormant).
This means that you can apply for new individual protection if you already have enhanced protection, fixed protection or fixed protection 2014. When you have individual protection, your LTA will be equal to the value of your pension savings at 5 April 2016, subject to an overall maximum of £1.25 million but, unlike with fixed protection, you will be able to continue saving. Any contributions and investment growth over your individual lifetime allowance will be subject to the LTA charge.
Further details about IP 2014 can be found at https://www.hmrc.gov.uk/manuals/ptmanual/ptm094000.htm .
How to apply for Protection?
You will not be able to apply for transitional protection until after 5 April 2016. The application process will be on line and you will need to provide details about yourself and your pension savings, as well as details of any other LTA protections that you already have. If you want to apply for individual protection, you will also need to know the value of your pension savings on 5 April 2016. If your application is successful, you will be given a protection reference number and, for individual protection, confirmation of your individual LTA. You will need this when you want to take your benefits using your protected LTA.
Please note that the deadline for applying for IP 2014 is 5 April 2017, so if you have a relevant amount of more than £1.25 million you could consider applying for IP 2014, which would give you a higher protected LTA than the new individual protection.
This is a complex area and if you believe that you will be affected by the above you should speak to your financial adviser.
DIRECTOR OF FINANCE